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Rothesay Is Said to Take Lead for Prudential's U.K. Annuities

(Bloomberg) -- British insurer Rothesay Life, backed by Blackstone Group LP, is emerging as the lead bidder to buy at least 10 billion pounds ($13.8 billion) of U.K. annuities from Prudential Plc, according to people with knowledge of the matter.

Rothesay is on track to beat out Legal & General Group Plc, the Scottish Widows pension unit of Lloyds Banking Group Plc and Pension Insurance Corp., the people said, declining to be identified because the deliberations are confidential. The entire portfolio could be worth about 1-1.5 billion pounds, they said. The suitors have been bidding for all or part of the book, they said.

No final decision has been made, and one of the other suitors may ultimately prevail, the people said. Representatives for Prudential, Rothesay, Blackstone, L&G and PIC declined to comment. Scottish Widows didn’t immediately respond to requests for comment.

Insurers such as Prudential have been looking to exit the annuity business to free up capital for share buybacks, debt repayment or acquisitions. The deals are attractive to private equity-backed firms including Blackstone, Apollo Global Management LLC and Atlas Merchant Capital, who are betting that they can generate better returns than insurers. Liabilities on the contracts for annuities -- which guarantee customers a future steam of income in return for a lump sum -- can rise if interest rates are lower than anticipated, or if equity markets plunge.

Blackstone, Singapore’s sovereign wealth fund GIC Pte and Massachusetts Mutual Life Insurance Co., who initially acquired a majority stake in Rothesay in December 2013, bolstered their holding by buying out Goldman Sachs Group Inc. in August. With those firms’ backing, the insurer has so far acquired Metlife Assurance Ltd. and its 2.5 billion-pound bulk annuity book in May 2014, followed by a 6 billion-pound U.K. annuity portfolio from Aegon NV in April 2016.

The deal will free up million of pounds in capital that Prudential had set aside under the European Union’s Solvency II regulations, designed to protect insurers from a once-in-200-years shock. The U.K.’s largest insurer began signaling its intention to scale back on U.K. annuities in January 2016, and Chief Executive Officer Mike Wells said in an August interview that it’s considering “internal and external ways to de-risk” some of its 45 billion-pound backbook, adding that the business is profitable but capital intensive.